Have We Hit The Top?

[james22]

3 hours ago, TwoCitiesCapital said:

Why not buy mortgages, corporates, HY, and EM all which yield more than that to start and call it a day? 

 

How'd that work out this year?

[TwoCitiesCapital]

44 minutes ago, james22 said:

 

How'd that work out this year?

 

Not too bad. I'm positive  across all of my accounts - even th fixed income ones. 

 

Owning fixed income in 2021/2022 was crazy. Owning it in 2023 hasn't been too bad - even with subsequent rate hikes. 

 

Rates haven't moved much except at the front end and because there basically isn't any duration at the front end the coupon yields made up for higher rates. 

[UK]

9 hours ago, TwoCitiesCapital said:

And all of this is trying to get to 6%. Why not buy mortgages, corporates, HY, and EM all which yield more than that to start and call it a day? 

 

Because if you are not looking at the very short term or hoping to trade them in one or two years, in a longer term (10 years is good enough), if something unexpectedly bad in a major way happens with purchasing power of the currency (don't you share this worry, if you own Bitcoin?), fixed income instruments will be screwed and equities, like other real and/or productive assets, will more or less compensate for this. In some minor way this is just what happened in the last few years with this transitory thing. Maybe we all have our own biases, but I started investing long time ago in equities not because I was seeking some out sized returns, but from fear and in order to preserve what I could save at the time. After seeing with my own eyes before two currencies turning to toilet paper slowly and then quite suddenly:), I just never understood how earning less than 8-10 (which for me in EUR was the case with government bonds all the time, except once, in more then 20 years) was not picking pennies in front of a steamroller. Call it some kind of PTSD from paper money devaluation, but basically only a real estate and equities were the options for me.

 

This poster sums it up:)

 

Edited September 15, 2023 by UK

[RichardGibbons]

5 hours ago, Dinar said:

@RichardGibbons, what do you think the implications of a 99% inheritance tax will be?  I will bet that you will 

a) see tax collection decline

b) people move out of the country (like Eduardo Saverin did)

c) massive misallocation of resources and economic destruction.  (If I had a net worth of $200MM and could only leave $30MM to my kids, I would move out of the US.  If I was prevented from doing so, I would then buy $170MM worth of apartment buildings or a really scarce commodity and burn them down.  Most of the kids I know from high school would do same thing by the way.)  

 

My baseline outcome is Bernie and AOC wailing and gnashing their teeth that billionaires have too much money, billionaires wailing and gnashing their teeth and spending resources to try to avoid the tax.

 

I think it wouldn't negatively impact small entrepreneurship much, because I don't think young people will decide not to get rich because their kids won't have the chance to be billionaires. I'm not sure the extent to which it will effect big entrepreneurs like Musk and Bezos, but it doesn't seem to me that Musk and Bezo's motivation is to make their kids rich.

 

I suspect it will largely impact the decisions of people who are older than 50 with children, but I think those decisions aren't that important for innovation and can be counter-productive (like monopolies leveraging their position), and it's a toss-up for me whether their reaction will be a net positive or net negative for society.

 

In broader society, I think there will be an increase in social cohesion which is the key to the good outcomes in societies. I think there will be efforts to get the well-educated kids of rich parents to start their own business while they can lean on parents for help. I think people will become more tolerant of billionaires. I think monopolies will be harder to sustain. I think there will likely be more tax revenue. I think there will likely be more focus on innovation and more entrepreneurialism as youth will have more resources to mess around with.

 

a) Can't know for sure, but I think maybe not. But it's super hard to predict these things, so I wouldn't bet any amount of money on it. Second- and third-order effects in taxation are hard. Does Elon stop innovating after PayPal because he's worried that his 15 kids won't get an inheritance?  I think not, but I could easily be wrong.

 

b) Yeah, people can totally do this as long as they pay the exit tax at a marginal rate of 99% on amounts over $30M. You have to move when extreme wealth is fairly certain, but you haven't achieved it yet.

 

c) Well, I think most successful people don't get off on willful destruction because not doing that is a significant part of why they're successful. I'd be pretty surprised if Buffett destroyed Berkshire in a fit of pique. (And if he did, it would be neat to see which companies would rise up in its place, and what the people you paid $170M would build with that capital.)

 

Just out of curiosity, what's solution do you have to combat growing wealth inequality? I'd be happy to adopt your solution if it seems more sensible than mine. I think it's quite a hard problem to solve without breaking capitalism, so I'd sincerely love to hear of something better than my proposed strategy.

 

(If your solution is, "do nothing", I think that's an awful solution in a country with human rights and the second amendment. If wealth gets too skewed, I think life for everyone, including the rich, becomes not much fun.)

[Gregmal]

All I’ll say is that since I’ve been in the market, now over a decade, almost two actually, there was an overwhelming chorus of people voicing @TwoCitiesCapital concerns. Recession calls literally every year. Bubble calls dating back to 2012. “How in the world could we possible get positive returns on a forward basis” the whole way. Especially starting in 2014. Forward returns will be awful were a popular refrain in….2015…..

 

Of course none of this matters because every year that goes by we have more and more hindsite wisdom as to why the past is unsustainable. You can literally check the “bottom” thread to find this exact wisdom at this point last year! The same negativity was present 20-40% ago! But now they’re even MORE certain. Prescient calls about how this time is different and 400,000 intelligent reasons why. And even an idiot could have just bought the market or the biggest and most popular names out there and crushed the precious treasury/bonds/note and gotten 4-7, maybe even 10 years worth of returns! 
 

So I won’t go as far as to say to totally ignore the skepticism; but I will say it’s ALWAYS there. It ALWAYS sounds great and intelligent. And so far, it ALWAYS fails to impress. 
 

Bottom line is if you are young…own equities. Bonds are for retirees and the .5% who can slay distressed. That’s not anyone here.

[UK]

Btw, it is interesting situation re interest rates and its impact on these magacap companies:

 

https://www.wsj.com/economy/rising-rates-make-big-companies-even-richer-718eafce?mod=hp_lead_pos5

 

The Federal Reserve jacked up interest rates to slow the red-hot economy. At some of the biggest and most secure companies, the moves had the opposite of the intended effect, boosting their profits and spending power. The winners from higher rates were high-quality borrowers, who locked in low interest rates around the pandemic with bonds maturing further in the future than any time this century. Higher rates have little immediate impact on their borrowing costs—only affecting bonds when they are refinanced—while they earn more on their cash piles straight away.

...

Of course, nothing is forever. The disparity between the winners and losers from rate increases provides yet another reason why the biggest stocks—the winners—have been by far the best performers this year. But threats to the dynamic loom: Time and the economy. The longer the Fed keeps rates high, the more bonds of even the best-quality issuers will have to be refinanced at a higher cost. And if the economy finally breaks, cyclical companies—those most sensitive to downturns, such as carmakers—faced with sharply lower cashflows will struggle to pay even low interest rates they locked in long ago. Until then, we live in strange times. Rising rates make a big part of the economy feel richer—not poorer.

 

Edited September 15, 2023 by UK

[Luca]

6 hours ago, Gregmal said:

All I’ll say is that since I’ve been in the market, now over a decade, almost two actually, there was an overwhelming chorus of people voicing @TwoCitiesCapital concerns. Recession calls literally every year. Bubble calls dating back to 2012. “How in the world could we possible get positive returns on a forward basis” the whole way. Especially starting in 2014. Forward returns will be awful were a popular refrain in….2015…..

 

Of course none of this matters because every year that goes by we have more and more hindsite wisdom as to why the past is unsustainable. You can literally check the “bottom” thread to find this exact wisdom at this point last year! The same negativity was present 20-40% ago! But now they’re even MORE certain. Prescient calls about how this time is different and 400,000 intelligent reasons why. And even an idiot could have just bought the market or the biggest and most popular names out there and crushed the precious treasury/bonds/note and gotten 4-7, maybe even 10 years worth of returns! 
 

So I won’t go as far as to say to totally ignore the skepticism; but I will say it’s ALWAYS there. It ALWAYS sounds great and intelligent. And so far, it ALWAYS fails to impress. 
 

Bottom line is if you are young…own equities. Bonds are for retirees and the .5% who can slay distressed. That’s not anyone here.

Greg, do you agree that at 26x earnings the Index is very expensive considering current interest rates? Buying the index for 28x earnings in December 1999 led to negative returns over a 10 year period till december 2009 where it then traded at 19x earnings. I agree that owning decent businesses at high yields is much better than bonds etc but if you are starting to get 6-7% on corporates etc while the index doesnt adjust to the new risk free rate reality? Still always smarter to find value even in an expensive market than to switch to bonds but i think @TwoCitiesCapital focussing more on bonds now when things are objectively expensive is better than buying the index without thinking about it. 

 

I also wonder how bubblesque the SP 500 has become when all these index fund companies own around 30% of the stock market, sometimes even own so much that if people would sell the fund, exit liquidity is so small that it just would destroy some stocks.  

 

 

 

At some point the liquidity has to go down if risk free rate gets attractive enough.

[Sweet]

7 hours ago, Gregmal said:

All I’ll say is that since I’ve been in the market, now over a decade, almost two actually, there was an overwhelming chorus of people voicing @TwoCitiesCapital concerns. Recession calls literally every year. Bubble calls dating back to 2012. “How in the world could we possible get positive returns on a forward basis” the whole way. Especially starting in 2014. Forward returns will be awful were a popular refrain in….2015…..

 

Of course none of this matters because every year that goes by we have more and more hindsite wisdom as to why the past is unsustainable. You can literally check the “bottom” thread to find this exact wisdom at this point last year! The same negativity was present 20-40% ago! But now they’re even MORE certain. Prescient calls about how this time is different and 400,000 intelligent reasons why. And even an idiot could have just bought the market or the biggest and most popular names out there and crushed the precious treasury/bonds/note and gotten 4-7, maybe even 10 years worth of returns! 
 

So I won’t go as far as to say to totally ignore the skepticism; but I will say it’s ALWAYS there. It ALWAYS sounds great and intelligent. And so far, it ALWAYS fails to impress. 
 

Bottom line is if you are young…own equities. Bonds are for retirees and the .5% who can slay distressed. That’s not anyone here.

This.  When I started investing the forum I originally posted on was full of pessimistic people calling market tops.  The amount of money I lost by listening to them and not just buying equities is not worth thinking about.

 

Valuations of the overall market might be high, but the market doesn’t have to correct anytime soon, and if it does it might manifest itself as a smaller 5 year return without a significant drop.  There seems to be this expectation of a deep stock market reversal.  I’ve been hearing this said for years now.

 

I think the market valuation is lofty too, and I think rates will bring those valuations down… when and by how much is impossible to know so I just ignore.  Pick your spots and avoid the hyped up shit.  Nobody is forcing you to own the broad market.

 

And fundamentally the market is different now.  There are soo much monthly flows from pension funds just blindly indexing, all the time, every month.  The market has an enormous wind at its back that’s hard to fight against.

 

Edited September 15, 2023 by Sweet

[Luca]

29 minutes ago, Sweet said:

I think the market valuation is lofty too, and I think rates will bring those valuations down… when and by how much is impossible to know so I just ignore.  Pick your spots and avoid the hyped up shit.  Nobody is forcing you to own the broad market.

 

And fundamentally the market is different now.  There are soo much monthly flows from pension funds just blindly indexing, all the time, every month.  The market has an enormous wind at its back that’s hard to fight against.

+1.

 

Returns might just end up being meh, but without a correction.

[Gregmal]

50 minutes ago, Luca said:

Greg, do you agree that at 26x earnings the Index is very expensive considering current interest rates? Buying the index for 28x earnings in December 1999 led to negative returns over a 10 year period till december 2009 where it then traded at 19x earnings. I agree that owning decent businesses at high yields is much better than bonds etc but if you are starting to get 6-7% on corporates etc while the index doesnt adjust to the new risk free rate reality? Still always smarter to find value even in an expensive market than to switch to bonds but i think @TwoCitiesCapital focussing more on bonds now when things are objectively expensive is better than buying the index without thinking about it. 

 

I also wonder how bubblesque the SP 500 has become when all these index fund companies own around 30% of the stock market, sometimes even own so much that if people would sell the fund, exit liquidity is so small that it just would destroy some stocks.  

 

 

 

At some point the liquidity has to go down if risk free rate gets attractive enough.

I think once you remove the fan favorite stocks that the market is neither expensive nor setup for any sort of outlier stretch worth fretting. But ultimately, the exact PE can change and all I have to go off is historically how I’ve heard the exact same arguments about how it’s super unlikely to see favorable future returns and yet here we are. So instead of drawing some definitive conclusion I just kinda shrug and then look for stocks to buy and there’s no shortage of stuff you can buy and make money. 
 

On rates, again, idk but I think people tend to get too obsessed with rates. There’s always kinda been this love affair people have with proclaiming that rates are the end all, be all in determining stock values. Which I’ve never quite understood because you also learn on day 1 or 2 when investing, that stocks are different than bonds. The 30 year matters and it’s what? A couple points higher than it was a few years ago. Definitely not life changing. Other than that, who cares what short term rates are because they’ll soon need to be replaced as a bond eventually gets extinguished. 

[Spekulatius]

I think higher real interest rates  over time will reduce wealth inquality. It will over time bring asset values down and lead to higher earnings yield which makes it easier for savers to acquire them. This is good for those starting out but not so good for those owning assets.

 

Other thing is divergence between management pay and average worker pay. There is very little rationale for top management pay increasing much faster than workers pay. There is for example very little correlation between stock performance and management pay and excessive pay has shown to be detrimental to shareholder returns in studies that I don't remember.

[Dinar]

@RichardGibbons, I grew up in the Soviet Union, you do NOT want to live in a place where everyone is equal.  The US does have serious problems and this is how I would begin to address them:

 

a) Stop immigration.  Immigration expands labor supply and depresses wages, particularly for unskilled and the poor.  Raises cost of housing, again impacting the poor and middle class the most.  

b) Fix public school system (just don't spend more money - NYC spends USD 40K per kid, and outcomes are awful, Newark tripled its spending per pupil, nothing improved.) and give vouchers for private schools to kids.  Break the monopoly of public schools.  Mandate personal finance classes in every grade starting with 5th in every school, and teach personal responsibility.  Classes how to choose a spouse, a job.  

c) End federal guarantee of student loans which just serve to enrich colleges.  Use the money to reduce budget deficit.  

d) End personal income tax on the first USD 50K of income of you are single, $100K if you are married, and say $100K if you are single + kids, $200K if you are married with kids.  End all personal deductions, including for charity and mortgage interest.  

e) Fix healthcare system which is dysfunctional and a cancer on the US.  Three quick solutions: 1) Every hospital/medical practice should have publicly listed price list and law of one price - you have to charge everyone, ensured and uninsured same price, no $50K bill but $10K if you have insurance (80% discount negotiated by your insurance company) and $50K if you pay cash.  2) Mandate that for every medicine in the US, pharmaceutical companies cannot  charge more than say 30% more than the same medicine costs in Canada.  3) Ban rebates and other abusive practice in the pharmaceutical industry in the US.  

f) Reform welfare and other social programs.  It should not be that in the US, a single mother with 2 kids gets so much generous support that she needs to earn $150K per annum in NYC before she is better off working than sitting on the dole.  

g) Stop the whole switch to solar and wind which is very expensive, particularly for the poor, and build nuclear power plants - cheap, environmentally friendly electricity.

 

I am sure that there are a number of things that should be done that I have missed.  

[Spekulatius]

@DinarYou forgot tort reform. The US legal system is probably the largest vampire after health care and in realty those two vampires are pretty much intertwined.

 

here is a table for Schmerzensgeld (lit. Pain money) for medical malpractice:

 

Death from to heart attack due to mal diagnosis - 10K Euro. Paralysis due to mistake at surgery 220K Euro. Good luck finding a lawyer to take your case unless you pay yourself.

 

 

Edited September 15, 2023 by Spekulatius

[Dinar]

@Spekulatius, yes, you are absolutely right.  

[james22]

8 hours ago, Gregmal said:

All I’ll say is that since I’ve been in the market, now over a decade, almost two actually, there was an overwhelming chorus of people voicing @TwoCitiesCapital concerns. Recession calls literally every year. Bubble calls dating back to 2012. “How in the world could we possible get positive returns on a forward basis” the whole way. Especially starting in 2014. Forward returns will be awful were a popular refrain in….2015…..

 

Of course none of this matters because every year that goes by we have more and more hindsite wisdom as to why the past is unsustainable. You can literally check the “bottom” thread to find this exact wisdom at this point last year! The same negativity was present 20-40% ago! But now they’re even MORE certain. Prescient calls about how this time is different and 400,000 intelligent reasons why. And even an idiot could have just bought the market or the biggest and most popular names out there and crushed the precious treasury/bonds/note and gotten 4-7, maybe even 10 years worth of returns! 
 

So I won’t go as far as to say to totally ignore the skepticism; but I will say it’s ALWAYS there. It ALWAYS sounds great and intelligent. And so far, it ALWAYS fails to impress. 
 

Bottom line is if you are young…own equities. Bonds are for retirees and the .5% who can slay distressed. That’s not anyone here.

 

I was pretty much all Small Value (factors), Emerging Markets (Modern Portfolio Theory), and Cash (valuation) from the Great Financial Crisis to retirement in 2020. Because that was what all the smart guys (Fama-French, DFA, Swedroe, Hussman, etc.) recommended. I've all the books.

 

(Despite working in Corporate Planning and spending my time forecasting the impact of technological change.)

 

That was costly.

 

The Covid dip allowed me to shift from 50/50 to 90/10, and more recently I've made a significant allocation to Information Technology.

 

Admitting I've been off-sides has been difficult, but like Templeton conceded: when people say things are different, 20% of the time they are right. All the history-informed smart guys miss that.

 

Don't want to be the value investor who capitulated in 1999, but optimism seems to carry the day. 

 

I'll defend my optimism with the Dow 36,000 and "second half of the chessboard" arguments, but really it's just a belief that the Wall of Worry will continue to be climbed.

[james22]

13 hours ago, TwoCitiesCapital said:

 

Not too bad. I'm positive  across all of my accounts - even th fixed income ones. 

 

No benchmark?

[Gregmal]

9 minutes ago, james22 said:

 

I was pretty much all Small Value (factors), Emerging Markets (Modern Portfolio Theory), and Cash (valuation) from the Great Financial Crisis to retirement in 2020. Because that was what all the smart guys (Fama-French, DFA, Swedroe, Hussman, etc.) recommended. I've all the books.

 

(Despite working in Corporate Planning and spending my time forecasting the impact of technological change.)

 

That was costly.

 

The Covid dip allowed me to shift from 50/50 to 90/10, and more recently I've made a significant allocation to Information Technology.

 

Admitting I've been off-sides has been difficult, but like Templeton conceded: when people say things are different, 20% of the time they are right. All the history-informed smart guys miss that.

 

Don't want to be the value investor who capitulated in 1999, but optimism seems to carry the day. 

 

I'll defend my optimism with the Dow 36,000 and "second half of the chessboard" arguments, but really it's just a belief that the Wall of Worry will continue to be climbed.

The reasons IMO are simpler than one would think. You see it now from all the people who predicted doom last year. Or the year before. Or the recessions...theres always an excuse or a "darnit! if it wasn't for xyz....I woulda been right" approach. Its almost an addiction. Why haven't we had the most predicted recession ever yet? Oh because of stimulus! Oh because of credit cards! Oh because the government goosed GDP by spending! But the answer to overcoming that stuff is by inverting the approach a little. Why is it the more times than not, bad outcomes are avoided? Well, gee, probably because its in everyones interests to avoid them LOL..duh. Everyone, from company employees, to governments, etc...is generally working to keep things as is or make them better. Sure we can argue about the potency or effectiveness...but from 30,000 feet above, it really shouldnt be shocking why the terrible outcomes dont happen nearly as often as predicted. 

[dealraker]

40 minutes ago, Gregmal said:

The reasons IMO are simpler than one would think. You see it now from all the people who predicted doom last year. Or the year before. Or the recessions...theres always an excuse or a "darnit! if it wasn't for xyz....I woulda been right" approach. Its almost an addiction. Why haven't we had the most predicted recession ever yet? Oh because of stimulus! Oh because of credit cards! Oh because the government goosed GDP by spending! But the answer to overcoming that stuff is by inverting the approach a little. Why is it the more times than not, bad outcomes are avoided? Well, gee, probably because its in everyones interests to avoid them LOL..duh. Everyone, from company employees, to governments, etc...is generally working to keep things as is or make them better. Sure we can argue about the potency or effectiveness...but from 30,000 feet above, it really shouldnt be shocking why the terrible outcomes dont happen nearly as often as predicted. 

Heck, I predict all kinds of things...put changegunnacome to shame on that.  Just never invest based on them predictions...

 

...because my predictions suck just like everybody else's.  

[james22]

1 hour ago, Gregmal said:

The reasons IMO are simpler than one would think. You see it now from all the people who predicted doom last year. Or the year before. Or the recessions...theres always an excuse or a "darnit! if it wasn't for xyz....I woulda been right" approach.

 

At least in my case, it's also that I could credit myself with patience if I stuck with it. And I could defend the previous allocation by reference to the smart guys.

 

Whereas changing strategy means admitting I'm both giving up the chance of eventually being proven right and  am now assuming the risk of being proven whipsawed wrong. Now I'm alongside every other drunk at the party bragging how they're killing it in tech.

Edited September 15, 2023 by james22

[TwoCitiesCapital]

11 hours ago, UK said:

 

Because if you are not looking at the very short term or hoping to trade them in one or two years, in a longer term (10 years is good enough), if something unexpectedly bad in a major way happens with purchasing power of the currency (don't you share this worry, if you own Bitcoin?), fixed income instruments will be screwed and equities, like other real and/or productive assets, will more or less compensate for this. In some minor way this is just what happened in the last few years with this transitory thing. Maybe we all have our own biases, but I started investing long time ago in equities not because I was seeking some out sized returns, but from fear and in order to preserve what I could save at the time.

 

I've said it before, I'll say it again. Bonds had a better return in the 70s than equities did. Short term absolutely. Intermediate did so too with some basic assumptions (didn't buy at the extreme highs, owned corporates instead of just treasuries, etc).

 

Equities are NOT a good inflation hedge - their duration is significantly longer than most fixed income investments and thus they're way more sensitive to accelerating interest rates and inflation.

 

They work best when it's low and stable. When it's moderate, they suffer more than bonds do (like in 2022 and in the 1970s). When it's high, stocks do "well" in that nominal returns do exceed bonds, but they don't come close to maintaining real purchasing power like necessary commodities do. 

 

You want a bet on deflation? It's bonds. 

You want to bet on stable/low inflation? It's stocks. 

You want to bet on inflation? It's commodities - particularly food and energy. 

 

If you're that terrified of hyper inflation, you're buying the wrong thing. If you're terrified of moderate inflation, you're still buying the wrong thing.

 

My ownership of Bitcoin isn't inflation related - the inflation impulse of Bitcoin is absolutely trounced by its secular growth curve and the changes in speculation within it. This is also why BTC went down significantly in 2022 despite inflation. There are multiple things driving BTC's return - inflation will not be significant amongst them until you have global adoption/acceptance. We're a long way from there. 

 

1 hour ago, james22 said:

 

No benchmark?

 

Not sure what you mean here? As in did I outperform the benchmarks for fixed income? 

 

I imagine it depends on which one you want to select? The Agg? A short term fixed income benchmark? A high yield one? An emerging markets one? A weighted benchmark  of all of them that changes each time I change my allocation?

 

I own bonds in all of these categories and generally believe more in absolute returns than relative. I also own equities and crypto that may, or may not, need to be considered. I also work in Finance meaning my compensation is heavily tied to markets so I may be more cautious than most. I dunno which of these considerations is relevant to your question, but I generally believe in absolute returns - not relative. 

 

Nobody is happy when they're down 30% and the index is down -35%. Relative returns seem to only be a bull market consideration, but I invest across the cycle. 

[Gregmal]

15 minutes ago, TwoCitiesCapital said:

 

Equities are NOT a good inflation hedge - their duration is significantly longer than most fixed income investments and thus they're way more sensitive to accelerating interest rates and inflation.

 

They work best when it's low and stable. When it's moderate, they suffer more than bonds do (like in 2022 and in the 1970s).

I don’t understand what intellectually honest and beneficial conclusion we can arrive at by continuing to claim this. Inflation started in June/July 2020. Today we are still in a modestly higher than normal inflation environment. So there is your inflation timeline. Why the insistence on cherry picking what was essentially a 6-12 month market panic?(that has since proven temporary and corrected itself). It just seems disingenuous to keep doing this and I don’t know but if I had to guess it’s being done to rationalize positioning a certain way, but ultimately void of real supporting data.

Edited September 15, 2023 by Gregmal

[UK]

37 minutes ago, TwoCitiesCapital said:

 

I've said it before, I'll say it again. Bonds had a better return in the 70s than equities did. Short term absolutely. Intermediate did so too with some basic assumptions (didn't buy at the extreme highs, owned corporates instead of just treasuries, etc).

 

Equities are NOT a good inflation hedge - their duration is significantly longer than most fixed income investments and thus they're way more sensitive to accelerating interest rates and inflation.

 

They work best when it's low and stable. When it's moderate, they suffer more than bonds do (like in 2022 and in the 1970s). When it's high, stocks do "well" in that nominal returns do exceed bonds, but they don't come close to maintaining real purchasing power like necessary commodities do. 

 

You want a bet on deflation? It's bonds. 

You want to bet on stable/low inflation? It's stocks. 

You want to bet on inflation? It's commodities - particularly food and energy. 

 

If you're that terrified of hyper inflation, you're buying the wrong thing. If you're terrified of moderate inflation, you're still buying the wrong thing.

 

To each his own / let's agree to disagree:)

[TwoCitiesCapital]

37 minutes ago, Gregmal said:

I don’t understand what intellectually honest and beneficial conclusion we can arrive at by continuing to claim this. Inflation started in June/July 2020. Today we are still in a modestly higher than normal inflation environment. So there is your inflation timeline. Why the insistence on cherry picking what was essentially a 6-12 month market panic?(that has since proven temporary and corrected itself). It just seems disingenuous to keep doing this and I don’t know but if I had to guess it’s being done to rationalize positioning a certain way, but ultimately void of real supporting data.

 

Why the insistence on ignoring that equities have had a significant negative real return while inflation was present? They sucked in the 70s and they appear to be sucking today the current rally notwithstanding. 

 

2020 had whopping inflation of 1% YoY by year end. Inflation didn't start until early-to-mid 2021. The first time it exceeded 3% YoY was April of 2021. S&P return from the end of April 2021, until now, has been 6.7% nominal. Inflation over those 28 months has been 15%. 

 

28 months and your real return on the S&P 500 has been -8.3% plus some dividends so call it ~(2%) annualized . Given the current debate of how expensive it is, contracting earnings, and attractive alternatives, it's quite possible we've just witnessed the BEST outcome for equities and it was still a negative real return. Some inflation hedge...

 

Meanwhile, WTI crude is up 44%. The world food index is flat from April 2021, but had spiked nearly 15%  in the 4 months leading up to April so take that however you want in determining if it's flat or down in real terms. At the very least, I'd call it a draw with equities 

 

Short term bonds are probably underperforming at this point, but we're dramatically outperforming the bulk of that period as well. So probably too soon call winners/losers there - it's path dependent from jow until whenever we want to pretend inflation stops. 

[james22]

38 minutes ago, TwoCitiesCapital said:

Not sure what you mean here? As in did I outperform the benchmarks for fixed income? 

 

You could have bet on stocks at the beginning of the year, yeah? Yet you bet on bonds.

 

YTD, that bet isn't paying off:

 

 VMBSX (Mortgages) +.23%

 

VICSX (Corporate) +2.18%

 

VWEAX (HY) +5.46%

 

VEGBX (EM) +6.01%

 

VFIAX (S&P500) +18.71%

 

VITAX (IT) +36.43%

 

It may have been the smart bet ex-ante, but . . . 

 

[Spekulatius]

Stocks really fail if there is political strive. All the stock markets that failed did so because politics in the country failed. Latest example is Russia, then there is Argentina, Egypt etc.

The US has been safe from political strive but I think it has become more likely and a bit comparable to the late 60's situation.

 

By the way, inflation is also a result of political failure.

Edited September 15, 2023 by Spekulatius